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Myles Ruck Chief Executive Liberty Group Limited 16 October 2003

“The challenges for revenue growth and profitability in a declining interest rate and low inflation environment.”. Myles Ruck Chief Executive Liberty Group Limited 16 October 2003. Have we seen this before?. In the UK : 1996 - 2000. Declining interest rates Declining inflation

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Myles Ruck Chief Executive Liberty Group Limited 16 October 2003

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  1. “The challenges for revenue growth and profitability in a declining interest rate and low inflation environment.” Myles RuckChief ExecutiveLiberty Group Limited 16 October 2003

  2. Have we seen this before?

  3. In the UK : 1996 - 2000 • Declining interest rates • Declining inflation • Positive life and pension business growth BUT • Beginning 2000 equity market slid into a bear phase

  4. From 2000 • Rates continued downward trend • Inflation continued to fall • Bear market grew worse • Investment returns were eroded AND …

  5. From 2000 (continued) • Guarantees exposed • Mortality rates under estimated (annuity contracts) • Mismatches • Poor investment performance • Threatened solvency ratios SO ...

  6. UK Life insurers on verge of bankruptcy

  7. From 2000 (continued) AND • Sales declined • Companies sold equities to avoid continued declines in asset values • New capital was raised • Profits fell • Dividends came under pressure BUT MEANWHILE …

  8. Back at the ranch … • High interest rate environment throughout • Relatively high inflation • Stronger capital adequacy ratios • Little or no forced equity sales • No capital raising required, but significant management action assumed by some companies AND…

  9. Back at the ranch … • Bear market less severe • Positive sales growth throughout • Weakening rand environment (helped sales) • Investment guarantees low relative to yields WE WEATHERED THE STORM!

  10. The new environment (SA) • Likely to achieve 3% - 6% inflation target range • Interest rates will adjust accordingly, moving lower • Can stock market go lower?

  11. The new environment (SA) (continued) Macro-economic forecast 2003 Actual 2002 2004 2005 2006 Real GDP (% p.a.) Prime (% average) Headline CPIX (% p.a.) annual average $/R (R average) 3,80 11,20 4,90 7,50 3,50 11,75 4,50 7,80 2,00 15,25 6,80 7,56 3,50 11,30 4,40 7,10 3,00 15,59 9,30 10,54

  12. The new environment (SA) (continued) • Increased savings likely to result (lower debt servicing costs >> more disposable income) • Contractual savings will gain market share as cash savings become less attractive

  13. The new environment (SA) (continued) • Shift from money-market to equity-type investments • Pension fund outflows likely to reduce

  14. Industry challenges and risks • Asset-liability matching • Particularly annuity portfolio (long duration and reinvestment risk) • Smoothed-bonus business • Negative bonus stabilisation reserves • Capital management • How much? (What CAR ratio?) • What asset mix?

  15. Industry challenges and risks (continued) • Earnings volatility • Investment returns and currency fluctuations • Investment guarantees • At what level in the future and at what cost? • New stochastic reserving basis >> volatility • Vulnerable to 10% shareholder entitlement to investment return • Both positive and negative returns

  16. Industry challenges and risks (continued) • Pressure on expenses (increase above inflation rate) • Skilled staff and IT costs • Large fixed cost infrastructure • Margin squeeze • Fixed management fees • Commission deregulation

  17. Industry challenges and risks (continued) • Outperform investment benchmarks and competitors’ investment performance • Competition from unit trust industry and other savings providers • Manage policyholders’ expectations • Customer retention

  18. Industry challenges and risks (continued) • Regulation and cost of compliance • FAIS, FICA • Exchange control • AC133

  19. So what is Liberty doing?

  20. Rm 2 000 1 730 1 800 1 637 1 600 1 400 1 057 1 200 1 024 1 000 800 479 600 400 200 - Revenue growth Total net cash inflow from insurance operations 1H99 1H00 1H01 1H02 1H03 Continued focus on being cash-flow positive and increasing the quantum - Premiums received exceed benefits paid

  21. Revenue growth (continued) Individual business market share

  22. Revenue growth (continued) • Boost premiums by focusing on: • Customer service • Improving persistency • Providing the right product • Educating the consumer

  23. Revenue growth (continued) • Growing market share • New markets (including Africa) • Distribution • Bancassurance

  24. Revenue growth (continued) • Manage benefit payments • Extend maturing policies • Offer attractive alternatives at maturity • Keep proceeds within the larger Liberty Group • Underwriting

  25. Profitability • Ensure that products are written on profitable bases • Cut and control expenses • Reduce cost per policy • Increase the in-force book • Accurate underwriting and risk rating

  26. Conclusion • Strong capital position • Largely matched book (annuities, guaranteed products and linked business) • Limited exposure to smoothed bonus business

  27. Conclusion (continued) • Positioned to benefit from flow out of money-market investments • Expect low interest-rate low inflation environment to be good for equity markets

  28. Yield Gap

  29. All Share Index trailing P/E ratioRises as interest rates decline RISC1 7 October 2003 F/C F/C

  30. Liberty is well positioned to meet the challenges of the new environment

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